Recession fears revived as store sales tumble

Retail sales were much worse than expected in February, a sign that consumers are cutting back.

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By Parija B. Kavilanz, CNNMoney.com senior writer

NEW YORK (CNNMoney.com) -- Monthly retail sales suffered a surprising drop last month as American households continued to curtail their spending amid higher energy and food prices and a weakening jobs market.

The Commerce Department reported Thursday that total retail sales fell 0.6%, compared to a revised 0.4% increase in January. January sales were originally reported to have increased 0.3%.

Economists surveyed by Briefing.com expected a 0.2% gain in retail sales for the month.

"The basic story from these numbers is that consumer spending growth has slowed, which is consistent with our assessment that the economy is in a mild recession," said Scott Hoyt, director of consumer economics at Moody's Economy.com.

A steep 1.9% decline in auto purchases led to the overall sales decline in February.

Stripping out volatile auto sales, sales fell 0.2% compared to a revised 0.5% gain in January. January sales, excluding autos, were originally reported to have increased 0.3%.

Economists had anticipated a 0.2% gain in the measure.

Excluding both auto and gas station sales, February's core monthly retail sales performance was the weakest since April 2003, said Hoyt.

Sales fell across a wide spectrum of retail categories, including furniture, electronics, gasoline station and department stores.

Furniture store sales fell 0.5%, sales of electronics declined 0.4%, department store purchases slipped 0.2% and sales of building materials dropped 0.7%.

Higher food prices resulted in a 0.3% decrease in grocery store sales last month as consumers either substituted higher-priced items with cheaper alternatives or cut back on the quantity of food and beverage products.

Gasoline station purchases, which have been bolstered recently by record-high fuel prices, also tumbled 1%.

Hoyt said consumers were responding to escalating gas prices by either cutting back on car usage or combining trips. "New car sales data also shows that more consumers are looking to buy fuel-efficient models," he said.

Among the few positive areas, consumers did buy new clothes for spring, resulting in a 0.2% gain in sales.

Will rebate checks provide relief?

The Bush administration is hoping that consumer spending will get a boost from the approximately $105.7 billion in tax rebate checks that will be distributed to taxpayers over the summer.

The National Retail Federation (NRF), the industry's largest trade group, expects as much as $43 billion of that additional stimulus will get directly pumped into the retail sector.

However, Hoyt remains skeptical about that outcome.

"The rebate money could have some impact on boosting consumer spending but we have to see to what extent it will be offset by soaring energy, food and gas prices," he said.

Besides those factors, Hoyt said the critical part of the consumer spending equation is the labor market, which also delivered very dour news this month. The Labor Department reported that job losses in February were the worst in almost five years.

"A worsening labor market, combined with inflationary pressures in the market, will lead to a downward spiral for the economy," said Hoyt.

At the same time, Hoyt said steady growth in income levels is the only reason that he's still "anticipating a mild recession" in 2008.  To top of page

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